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Fab Results From Taiwan's Biggest Fab

Taiwan Semiconductor's earnings support the notion that the semiconductor recovery is underway.

If you needed much more proof that there really has been an improvement in the semiconductor industry, look no further than Taiwan Semiconductor's (NYSE:TSM)earnings.

Fourth-quarter sales jumped more than 27% from last year (when things started getting ugly) and were also up more than 17% from the third quarter. That was a larger-than-expected jump in demand, and it pushed the company's capacity utilization to 104%. Now, I know operating at above 100% capacity seems like a contradiction, but the hunch is that baseline 100% capacity is generally built upon normal work and maintenance schedules and so leaves a little headroom in times like these.

Whatever the case, higher capacity utilization led directly to better margins for Taiwan Semiconductor. The gross and operating margins were both substantially higher than in the year-ago period, and that ultimately led to a 53% rise in net income and a 50% increase in earnings per American Depositary Share.

Looking at the makeup of results, it would seem that the holidays provided a better than expected boost. Consumer applications made up a higher percentage of the total -- suggesting that demand for gadgets like Microsoft(NASDAQ:MSFT) Xboxes and Apple iPods were a welcome help to the semiconductor industry in general in the fourth quarter.

So what does this all mean? I'd say it's a positive sign in general for customers like TexasInstruments(NYSE:TXN), Altera(NASDAQ:ALTR), and NVIDIA(NASDAQ:NVDA), as well as other fab operators like United Microelectronics(NYSE:UMC) and CharteredSemiconductor(NASDAQ:CHRT).

As for Taiwan Semiconductor specifically, I can still see better days ahead. Yes, guidance for the next quarter was a little soft compared with this quarter, but that's pretty normal. And while I see some upside from a cash flow valuation standpoint, I'm also more than willing to admit two key details -- first, my estimates on growth could be low (not unusual at the beginning of a recovery), and second, investors have a way of pushing these stocks even higher once the notion of "I gotta own a semiconductor stock" takes hold.